1 better air quality conference: agra, india - december 6-8 2004 sub-plenary session 5:co-benefits...

1Better Air Quality Conference: Agra, India - December 6-8 2004Sub-Plenary Session 5:Co-Benefits of Climate Change Mitigation and Urban AQM

Financial Analysis for Successful IES Project Implementation

U.S. Environmental Protection AgencyPresented by:Vaqar ZakariaHagler Bailly Pakistan


Why focus on Financing? Financial barriers are often cited as a key reason more IES related projects are not implemented.Outline• Background • Funding Organizations and

Mechanisms • Tools for Project Financial Analysis


Background

• IES identifies policies & programs that reduce air pollutants and GHG

• Costs and benefits of specific emissions reductions options have been modeled (for some countries)

• EPA is interested in enhancing prospects for implementing IES projects by increasing awareness of financial considerations early and throughout the IES process

• To improve prospects, a focus is placed on identification of barriers to implementation, and dissemination of information: – Potential funders and their information requirements for

projects– Critical elements of successful proposals– Analytical tools that can assist in analyzing projects


Funding Organizations & Mechanisms

• Multilateral and bilateral institutions

• Private foundations

• Local development banks

• Private investors


Multilateral and Bilateral Institutions• Formed by two or more governments• Policies dictated by member countries• Types of Support

– Grant• A sum of money given to an entity without any

intent of financial return.– Soft loan

• Provided to an entity with concessionary terms. Soft loans generally do not require collateral.

– Commercial investment• Debt or equity that is expected to be repaid with

a positive return on the investment. Commercial investments generally require collateral.


Private Foundations• Derive capital from family, individual, or corporation• In U.S., tax laws stipulate foundations must donate

at least 5% of its endowment annually, primarily to nonprofits.

• Background information on individual foundations can be found at the Foundation Center: www.fdncenter.org.

• Types of Support– Operating support

• Awarded to nonprofits to cover general operating costs. – Program support

• Money for a specific initiative. Generally single-year grants.

– Program related investments• Recoverable payments such as loans, loan guarantees, or

equity investments.


Local Development Banks• Set up by an individual government to target

underserved communities or sectors.• Often focused on one sector or activity.• Generally provide some type of nonfinancial

service.• Types of Support

– Grant• Building capacity or markets. • Sometimes done through an affiliate.

– Soft loan• Intermediate step.

– Commercial investment• Aimed at overcoming a barrier to that particular

sector.


Private Investors: Financial Instruments• Working capital

– Short term (<1 year). Used to finance ongoing activities or inventories.

• Long-term debt– Generally greater than three years with set payment schedule.

Collateral required in commercial loans.• Equity

– Ownership share in a company. Activity must be private sector.

• Private Equity Funds– Fixed time frame (generally 10 years)– May have more than one “closing”– Have clear requirements

• Risk limits• Target returns• Sector• Investment stage


Typical Funding Process

Determine type of funding needed (grant, loan, equity)

Grant: Mission Similar programs Budget Monitoring

Research and Cultivate Funders

Loan or Equity: Business Plan Market Study Feasibility Analysis Projections

Letter of InquiryGather/Develop Materials

Write Application for Specific Funder

Receive Loan and Initiate Project

Monitor and Report

Additional Information Needed?

Accepted?

Yes

Develop Additional Material

No

Negotiate Terms

Yes

No

Continue with other Funding Sources

Continue with other Funding Sources

Yes

NoInvitation to submit proposal?


Example: Fuel Efficiency in Road Transport Sector (FERTS), Pakistan• Project focus on policies and practices:

– Upgrading technology base in the country for improvement of vehicular fuel efficiency and reduction of emissions

– Awareness in vehicle owners and service providers – Development of policies for modal shifts – Establishment of a revolving loan fund for energy

conservation investments in road transport sector

• Environmental focus of the $7 million GEF grant is climate change and criteria air pollution.


FERTS Project: Setting up of Energy Conservation Fund (ECF)• Fund set up and administered by ENERCON, the

National Energy Conservation Centre• Initial contribution of $ 3 million from GEF grant• Management by a Board of Directors drawn from

the public and private sectors• Additional contributions expected from the

private sector financial institutions and bilateral donors

• Interest rates maintained to provide incentives to borrowers, and to cover operating costs

• Lending risk to be covered by participating financial institutions


FERTS Project: Key Factors in Securing Resources for ECF• Good fit with GEF program goals (innovative

financing strategies to reduce climate change)• Local buy-in (Government and private sector)• Sustainability (fund will continue after the GEF

project ends )• Replicable (lessons can be transferred to other

GEF-targeted countries)• Administrative and management support provided

by project sponsor (in this case, ENERCON)• Identified and addressed project risks


Tools for Project Financial Analysis• Why use financial analysis Tools?

– To evaluate environmental benefits of potential energy efficiency (EE), renewable energy (RE), or transportation projects• Emissions avoided, polluting

technologies avoided– To evaluate profitability, net present value

(NPV), or rate of return (IRR) of RE and EE projects• Cash flow analysis• Real and levelized cost of energy


Examples of Available Analysis Tools• RETScreen International

– Spreadsheet based renewable energy project analysis software, evaluates cash flow, energy production, and GHG emissions. Downloadable at: http://www.retscreen.net/ang/menu.php

• RET Finance– Cash flow analysis tool. http://analysis.nrel.gov/

retfinance/• EM (Environmental Manual for Power Development)

– Database of plant and emission control costs, analyzes tradeoff between economic and environmental costs. www.oeko.de/service/em

• Proform– Spreadsheet model assesses RE and EE environment and

financial impacts. http://poet.lbl.gov/Proform/• E2/Finance

– Financial model evaluates project profitability www.tellus.org/general/software.html


Example Tool: RETScreen

• Inputs : Site location and renewable resource

conditionsEquipment specificationsEquipment cost modifications (beyond

defaults)Avoided cost of energy (if applicable)Financing type (debt, equity, mix) Interest rate, discount rate, project life,

income tax rateIncentives, grants


Example Tool: RETScreen

• OutputsAnnual energy production (MW, MWh)Estimated energy production by month, wind speed,

etc.Life-cycle costs (initial costs, annual Operating and

Maintenance, and Periodic costs)GHG emission reductionsAnnual financial savings or incomeCash flow analysis over project lifetimeFinancial indicators: Internal Rate of Return, Return

on Investment (ROI), Cost of energy production, Net Present Value of project, Benefit-Cost ratio, amount of debt payments and debt service coverage


Summary of Financial Analysis Tools

• All models are widely used around the world and produce output considered credible.

• All models provide useful evaluations, both financial and environmental, of renewable energy and energy efficiency projects, and some do transport projects.

• All models are available in free downloads.


In Summary: Key Elements toSuccessful Project Finance

• There are dollars (and other currencies) available

• Various financial instruments are available to fit the needs of specific projects

• Align project with goals of appropriate funders

• Get local buy-in early in the process• Raising money is a time consuming

process


For More Information: Contact

Jack FitzgeraldU.S. EPA, Global Programs [email protected]

1 better air quality conference: agra, india - december 6-8 2004 sub-plenary session 5:co-benefits...

Documents